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Tuesday, September 14, 2010

Who's Driving the Bus? Remember to Ignore the Headlines and Focus on Fundamentals AND, Importantly, VALUE

Monday's top two headlines on the WSJ online around 9am EST were:
followed by
Scratching your head? The first contradicted by the second? We're not kidding.

Of course, this is often par for the course in a sensationalized 24/7 media world, where -- in some cases -- one hand may not be aware of the other hand's actions. We previously called out disconnects between mainstream headlines and major 2Q10 earnings reports in our July post, Psychology Remains Fickle as The Big Bad Wolf Ignores Fundamentals.

On a related note, the other week, someone mentioned to us something to the effect:
  • "Now, all the media talks about is this 'double dip' idea and they seem to want us all to believe that it's happening. As a consequence, the stock market is as volatile as ever. I sure hope institutional investors aren't influenced by all of this nonsense!"
Our response: "Ah, but indeed, you bet they are!" Why? First, everyone is human, driven by psychology and, therefore -- like it or not -- influenced by factors (noise) in the surrounding environment. Second, so much money is short-term focused, trying to game next week, month, or quarter, moving in and out of positions, churning (trading) through portfolio positions. The money primarily moves based on data points ("catalysts") anticipated and/or created by all market participants, including companies, traders, investors, and the media.

Right now, uncertainty rules the day, even among the "pros." No matter that the ratio of equity free cash flow yields to bonds is near 50 year highs (per our prior post). For example, Bloomberg published an article last week highlighting what we've also shared, Dividends Beating Bond Yields by Most in 15 Years (sourced here via Yahoo Finance/YHOO). The article relays a message similar to that relayed by Hersh Cohen on Wealthtrack and in our prior post, Where to Stash Your Cash, opening with:
  • More U.S. stocks are paying dividends that exceed bond yields than any time in at least 15 years as profits rise at the fastest pace in two decades.
  • Kraft Foods Inc. and DuPont Co. are among 68 companies in the Standard & Poor’s 500 Index with payouts that top the 3.80 percent average rate in credit markets, based on data since 1995 compiled by Bloomberg and Bank of America Corp. While Johnson & Johnson sold 10-year debt at a record low interest rate of 2.95 percent last month, shares of the world’s largest health products maker pay 3.68 percent.
  • The combination of record-low interest rates, potential profit growth of 36 percent this year and a slowing economy has forced investors into the relative value reversal. For John Carey of Pioneer Investment Management and Federated Investors Inc.’s Linda Duessel, whose firms oversee $566 billion, it means stocks are cheap after companies raised payouts by 6.8 percent in the second quarter, data compiled by Bloomberg show.
YET, the article then shares commentary from a colleague of Hersh Cohen at Clearbridge:
  • “That’s the tug-of-war that’s going on right now,” said Peter Vanderlee, a money manager at ClearBridge Advisors, a unit of Baltimore-based Legg Mason Inc., which oversees $659 billion. “If we are going into a double-dip recession, maybe we’re not as cheaply priced as one would suggest. The other side of it is that if we’re just experiencing a slowdown, but we’re avoiding a recession, then prices are clearly attractive.”
Bottom-line: institutional investors are weighing the same well publicized risks as mainstream media and Joe Q. Public (e.g. the general public). How to get past the uncertainty? Focus on the underlying fundamentals and the price paid for a company. Listen to the advice relayed by James Grant in our Treasury Bonds are "Not Super Safe" post:
  • advice from Graham and Dodd - "can't know future, therefore seek margin of safety."
  • "in investments in present.... can't know what will happen in 2010 let alone 2017, but can observe two things: opportunities in front of us as now priced; and, how the world is positioning itself for an expected outcome."
Despite many problems, our own view is that fundamentals across many sectors are better than most currently acknowledge since the wall of worry rules the day. Evidence: who would believe that mattresses, landscaping gear, Christmas decorations (in July!?), and perfume are seeing robust sales? More evidence: global shipping trends and international demand for all kinds of goods and services. We see margins of safety in many different names, including our container shipping companies Seaspan (SSW) and Global Ship Lease (GSL). Likewise, in the discretionary sector, even our forsaken 1-800-Flowers.com (FLWS) and now-somewhat appreciated-by-the-Market Weight Watchers (WTW) offer compelling values from an owner's perspective. More on this in upcoming posts.

FINALLY, we were pleased to see one headline today via Yahoo Finance:
Excellent! What ever happened to investing? Consistently making money by trading is incredibly difficult and, in our view, akin to gambling. That said, the article starts with, "Wild gyrations on Wall Street have made U.S investors leery of buying individual stocks and skeptical that the market is a fair place to park their money." Admittedly, THIS SENTIMENT may take time to overcome (=overhang) as recent wounds will take time to heal.

BUT, history implies that humans tend to do the wrong things at exactly the wrong times. That this, as a group, we run to catch the bus along with everyone else, while paying no attention to who's driving the bus or in what direction. Here, the tag line from Bruce Berkowitz's Fairholme Funds is appropriate: "ignore the crowd."

BTW, we still have more to share on stocks versus bonds - this post was not intended as our promised second follow-up on this topic. We merely included the discussion of dividend yields versus bond yields to bring in the quote from the ClearBridge money manager (thank you to Bloomberg and Mr. Vanderlee!). We'll be back with a tad more.

Happy investing,

Jeffrey Walkenhorst

Disclosure: long SSW, GSL, FLWS, WTW, YHOO.

© 2010 Jeffrey Walkenhorst
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